High prices dampen fourth-quarter gold demand

Conditions deemed 'challenging' but likely to stabilize, industry group says

By

PolyaLesova

NEW YORK (MarketWatch) -- Soaring and volatile prices took their toll on demand for gold in the fourth quarter, particularly in the jewelry and retail-investment sectors, an industry report said Wednesday.

Overall identifiable gold demand declined by 17% in tonnage terms during the final three months of 2007 compared to year-earlier levels, according to the report by the World Gold Council, an industry group. Data for the report were compiled by GFMS Ltd., an independently owned metals consultancy.

'We better have sustained institutional interest in gold. Otherwise, we have a problem until prices come down to a more realistic level.'
Jon Nadler, Kitco Bullion Dealers

In 2007, dollar demand for the precious metal hit a record $79 billion, with identifiable gold demand rising to 3,457 tons, up 4% from the prior year.

Gold prices reached record highs in recent months and are currently trading above $900 an ounce. Gold has surged by more than 8% in the year to date and by 36% over the last one year in dollar terms.

"High and volatile gold prices in recent months have meant we have now entered a period of challenging trading conditions in the gold market, which have heavily impacted consumer demand," said James Burton, chief executive of the World Gold Council, in a statement.

Once prices stabilize, buyers will come back to the market, he said.

In India, the world's biggest gold market and the one most sensitive to prices, gold demand tumbled 64% in the fourth quarter, a sharp reversal following 40% growth in the first three quarters of 2007.

In the United States, jewelry demand declined by 14% during 2007 as a result of a weakening economy, sluggish retail spending and record high gold prices.

China has overtaken the U.S. as the second-largest retail market for gold jewelry in terms of volumes after India, with demand for jewelry reaching 302 tons and surpassing 300 tons for the first time since 1997.

The sharp drop in gold demand during the fourth quarter "was strictly an issue of too high of a price," said Jon Nadler, senior analyst at Kitco Bullion Dealers, commenting on the WGC findings.

"We better have sustained institutional interest in gold," he said. "Otherwise, we have a problem until prices come down to a more realistic level."

Nadler pegged such a level as, broadly, between $650 and $780 an ounce.

"The worrisome revelation in the WGC figures was the slump in retail coin and bar demand -- these are the 'man in the street'-type buyers out there," Nadler said. "If they are a shrinking group amid what is supposed to be an epic rally, our problems may be greater than estimated."

Kevin Kerr, president of Kerrtrade.com and editor of Dow Jones MarketWatch's Global Resources Trader, said: "Prices have climbed higher very quickly which has pushed some buyers out of the market."

"I expect that gold has a good speculative buying base, but global physical demand remains high too," Kerr said.

Inflows into the investment sector, including over-the-counter transactions in spot gold and derivatives, totaled $8 billion in the fourth quarter, the World Gold Council said.

While net retail investment, or buying gold bars and coins, rose by 2% on a year-over-year basis in 2007, it dropped by 39% to 67 tons in the fourth quarter compared with a year earlier.

After record inflows of 139 tons into gold exchange-traded funds in the third quarter of 2007, demand dropped to 78 tons in the last quarter. Total ETF demand was 251 tons for the year, 4% lower than 2006 levels.

Meanwhile, industrial demand for gold showed less sensitivity to high prices, hitting a record 465 tons last year, up 2% from 2006. Demand in the fourth quarter rose 2% year over year, reaching 77.4 tons, driven by rising sales of electrical goods such as flat-panel displays and MP3 players.

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